OPINION: HNA's annus horribilis set to roll into 2019

As the year comes to an end, China’s mysterious HNA Group appears to have made little headway in its ongoing struggles to pay down its debts, while investors punish its various operating arms.

In January, reports emerged about the aviation-to-finance conglomerate's struggle to meet interest payments on a mountain of debt amassed from a major acquisitions spree that saw it take stakes in airlines, banks and premium hotel brands around the world.

The crisis appeared to have been triggered by Beijing's orders to major Chinese banks to stop funding HNA and its various subsidiaries. That saw the company reverse course on a number of key acquisitions.

In the airline space, it sold down its 23.7% stake in Brazilian carrier Azul over the year, booking a $6 million loss. It purchased the stake for $450 million in 2016.

It continues to hold stakes in Virgin Australia, HK Express and French Blue, although there have been reports that it is open to offers for at least the Virgin stake.

In the middle of that was the untimely death of HNA’s chairman and co-founder Wang Jian from an accidental fall in France during a business trip in July.

HNA also sought to transfer stakes in seven businesses – including SR Technics,West Air and Hainan Tianyu Flight Training – to Hainan Airlines, but that fell through in November. That also scuttled a private share placement under which seven parties, including Singaporean sovereign wealth fund Temasek Holdings, were to have taken a stake in China’s number four carrier.

Since then, there have been reports that Hainan Airlines is weighing up bids to sell Lucky Air and Capital Airlines, two of the subsidiaries involved in its own tangled web. Already, other investors have pumped additional cash into Tianjin Airlines and Lucky Air, and the carrier has agreed to sell Urumqi Air.

In early December, a Bloomberg report claimed that HNA has nominated a number of real estate holdings and stakes in other businesses that are up for sale, with the deals potentially valued at $40 million. Curiously, that report indicated that the former CIT aircraft leasing unit, which merged with Avolon in 2016, is up for sale, as is a 70% stake in Avolon, which is owned by HNA-controlled Bohai Leasing.

But sources close to the company tell FlightGlobal that the report is wildly inaccurate. It also appears counter to Bohai’s stated intention to sell its other businesses and focus on leasing – particularly aircraft leasing.

DEBT SUFFOCATION

But even before the sell-offs, HNA’s disease had spread to most of its children, with major effects on their ability to raise debt cheaply.

Lessor Avolon, in particular, was badly affected by the ‘HNA overhang’, which prevented it from achieving an investment-grade rating, while its bond rates crept up over time. It has made special mention of efforts to ring-fence its capital from shareholder Bohai Capital, which in-turn is controlled by HNA.

Led by chief executive Domhnal Slattery, the lessor responded by looking towards other avenues for lower cost funding. That saw Avolon launch a sidecar with Chinese insurance group Cinda. Some sources close to the company have told FlightGlobal that one of the objectives of that sidecar was to tap Cinda’s investment-grade rating to allow it to finance its upcoming deliveries at better rates.

But its greatest reprieve to HNA’s woes came at the end of October when Bohai closed a deal to sell a 30% stake in Avolon to Orix Aviation. That took Avolon’s ratings into investment-grade, which will assist with keeping its cost of debt under control in the short-term.

There are varying reports that Bohai has sought other investors to buy stakes in the lessor. The collapse of a deal that would have seen Bohai Trust buy out HNA Capital’s shareholding in it however appears to have dampened that.

In the wake of that deal falling apart, Bohai has signalled plans to exit its other businesses and focus on operating leasing, particularly on the aircraft segment. It thus seems unlikely for further sales to take place, aside from the potential for further portfolio sales and sidecars.

Avolon aside, Hainan Airlines has also felt the HNA overhang in its latest debt issues.

While rates have been lifting for all Chinese carriers, Hainan’s coupon rates on its bonds issued this year have been around the 7.5% mark, despite the company being rated ‘AAA’ by Chinese ratings agencies.

But the biggest shock came from its US bond issue in September, where it was only able to attract $100 million of funding at a whopping 12% coupon. By comparison, its 2017 USD bond issuance raised $300 million at 6.35%.

Supplementing that, it also gained a CNY7.5 billion ($1.09 billion) syndicated bank facility from a group of Chinese banks, led by China Development Bank and also backed by ICBC, Bank of China, Agricultural Bank of China, China Construction Bank and Postal Savings Bank of China.

The airline said in a stock exchange notice that the loan will be used to meet its operational needs, including fuel, landing fees and maintenance costs. The facility can also be tapped by its other airline subsidiaries, including Capital Airlines, Tianjin Airlines and West Air.

With those bonds and the bank financing in place, Hainan Airlines is in little danger of falling short of cash over the next year. The high rates however increase its interest burden over the next few years, which could hit profitability.

That has already been on a slide, with its operating profit for the quarter ended 30 September falling 90% to CNY234 million. Its cash balance also fell to CNY24.9 billion at the end of the quarter, down from CNY39.1 billion the year prior.

WHICH WAY FORWARD?

Assuming that there is credence behind HNA’s latest asset sales push, it seems that the conglomerate will walk into 2019 in much the same condition it has been for most of the year – disarray.

A major part of that reflects HNA's failure to communicate clearly with the market its intentions on asset sales and reducing debt. The conglomerate is an integrated network of companies, many of which have cross-shareholdings in each other and complicated structures. It has therefore been left to the market and the media to try and make sense of its complex and opaque structure and strategy, often leading to rumours being reported as fact.

That aside, HNA desperately needs to make some major sales and demonstrate that the companies that remain within its fold can raise cash and continue to trade their way through. The CNY7.5 billion facility that Hainan recently announced is a sign that Beijing is again allowing policy banks to loan to HNA companies, perhaps signalling that the central government is more comfortable with how its units are faring.

Nonetheless, Beijing’s move this year to nationalise another struggling conglomerate – Anbang Insurance Group – could set a precendent for a similar move on HNA if it cannot get its house in order. Like HNA, Anbang had an Icarus-like rise and fall as a major acquirer of foreign assets, until Beijing stepped in during May to take control of it, with its chairman Wu Xiaohui sentenced to 18 years in prison for embezzlement and fraud.

Perhaps in preparation for state intervention, HNA appears to have been currying favour with the Politburo. Possibly the best example of that was its signing in June of a “strategic co-operation agreement” with Comac, under which HNA said it would order up to 200 ARJ21s. That was followed by another agreement later in the year setting forth a path for the two collaborate on building aircraft maintenance and a leasing platform targetted at operating ARJ21s in Africa.

Then, at Airshow China in November, an ARJ21 that will be delivered to HNA carrier Urumqi Air was on static display. The show saw the announcement that two of the jets will be delivered by year-end to the carrier, which Flight Fleets Analyzer shows operates 15 Boeing 737NGs and one Embraer 190.

Interestingly, that announcement was followed shortly afterwards by another that Hainan will transfer most of its stake in Urumqi Air to the municipal government. Indeed, a number of its domestic airline affiliates have investors tied back to provincial and municipal govenrments, showing that while it is not directly connected to Beijing, HNA is still strongly linked to different levels of government.

But, for now, it seems that Beijing is keeping its powder dry. Arguably, it has bigger issues to deal with around a slowing economy and the trade tensions with the USA.

That means that HNA will continue to waddle its way through its self-made debt mess, selling whatever assets it can to deal with its liabilities. Until it can show that it has its debt under control, its operating businesses will struggle against the HNA overhang.

There will be many in HNA’s various investments that are hoping that 2019 brings better news ahead, but given the opaqueness of the company, it may be hard to interpret what is good news and what isn’t.